Trading Earnings Optimism With Options in Apple Inc

Apple Inc (NSDQ:AAPL) : Trading Earnings Optimism With Options

Date Published:
2019-01-5

Disclaimer

The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

Preface

There is a powerful pattern of optimism and momentum in Apple Inc (NSDQ:AAPL) stock right before of earnings, and we can capture that pattern by looking at returns in the option market.
The strategy won't work forever, and in fact, it hasn't even won more often than it has lost, but since this strategy has a celever risk control, the winning trades are so much larger than the losing trades, that it has returned 134% annualized returns.

PREMISE

The premise is simple -- one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the two-weeks before an earnings announcement.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk -- and it is very powerful in Apple Inc.

The Options Optimism Trade Before Earnings in Apple Inc

Let's look at the results of buying a monthly call option in Apple Inc two-weeks before earnings (using calendar days) and selling the call before the earnings announcement.

Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet -- this absolutely takes on directional stock risk, so let's be conscious of that before we see the results, because they are mind bending.

Track this trade idea. Get alerted for ticker `AAPL` 14 days before earnings

We see a 41.1% return, testing this over the last 8 earnings dates in Apple Inc. That's a total of just 112 days (14 days for each earnings date, over 8 earnings dates). That's an annualized rate of 134%. That's the power of following the trend of optimism into earnings -- and never even worrying about the actual earnings result.

We can also see that this strategy hasn't been a winner all the time, rather it has won 4 times and lost 4 times, for a 50% win-rate and again, that 41.1% return in less than six-full months of trading.
The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.

Setting Expectations

While this strategy had an overall return of 41.1%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 20.5%.

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